Is Enbridge a Good Pick for Dividend Seekers?

Joe Gemino: Best idea and wide-moat Enbridge has one of the most attractive dividends in the Canadian energy sector. The stock currently has a handsome yield of 6%, which sits above the subsector's average. We expect Enbridge to increase its dividend by 10% in 2020, but only modest annual increases of 3% thereafter.

In our view, the dividend looks stable, and Enbridge maintains a healthy coverage ratio of 1.5x the cash dividend, which is also above the subsector’s average. The dividend is derived from the company’s contracted pipeline and regulated utilities businesses. Most of the company’s pipelines have long-term contracts in excess of 10 years, which further adds to our conviction of the dividend’s stability.

However, future utilization of the company’s crown jewel asset, the Mainline, is also the major risk to the dividend’s viability. If the pipeline’s future utilization were to be drastically cannibalized by the Keystone XL or Trans Mountain expansion projects, some concern could exist about maintaining the dividend levels. However, we don’t think this scenario is plausible, as we already forecast temporarily minor underutilization of the pipeline while competing projects are built, and we think there are enough low-cost oil sands supply to fill all available pipeline capacity over the long haul.

Enbridge remains one of our top picks in the energy sector, as we think the market is mistaken about the future of the company's cash flows associated with future mainline utilization and the Line 3 replacement project. However, we don't expect the market's concerns will be fully addressed for some time, which can lead to volatile swings in the stock. But we advise investors to stay the course while getting paid a handsome (and growing) dividend. Because in the end, we believe Enbridge's long and winding road will lead to 25% upside.